Creator: Martin, Vance, 1955- and Pagan, Adrian R. Series: Simulation-based inference in econometrics Abstract:
Procedures for computing the parameters of a broad class of multifactor continuous time models of the term structure based on indirect estimation methods are proposed. The approach consists of simulating the unknown factors from a set of stochastic differential equations which are used to compute synthetic bond yields. The bond yields are calibrated with actual bond yields via an auxiliary model. The approach circumvents many of the difficulties associated with direct estimation of this class of models using maximum likelihood. In particular, the paper addresses the identification issues arising from singularities in the yields and spreads which tend not to be recognised in existing estimation procedures and thereby overcome potential misspecification problems inherrent in direct methods. Indirect estimates of single and multifactor models are computed and compared with the estimates based on existing estimation procedures.
Keyword: Continous time models, Indirect estimation, Multifactor models, Term structure, Testing factor models, Stochastic differential equations, and Singularities Subject (JEL): C30 - Multiple or simultaneous equation models - General, C51 - Econometric modeling - Model construction and estimation, and G12 - General financial markets - Asset pricing ; Trading volume ; Bond interest rates